Chapter 13, Problem 30P

To determine

The Net present value of the project under consideration.

Answer to Problem 30P

Solution: The Net present value of project of purchase of Robots is $46,120.

Explanation of Solution

The Statement showing the computation of net present value of project is computed as under:

Computation of Net present value of project of Purchase of Robots
Net Annual savings:
Savings in Annual carrying cost of Inventory	210000
Savings in Labour cost (25000 DLH @16)	400000
Total savings			610000
Less: Annual Increase in Power cost	30000
Net Annual savings				580000
Annuity Present value factor (i=20%, n=5)		2.991
Present value of Annual savings in cost		1734780
Add: Present value of Release of Inventory		333200
($ 400,000* Present value of 1st year i.e. 0.833)
Add: Present value of Salvage value of investment		28140
($ 70,000 * Present value factor for 5th year i.e. 0.402)
Total Present value of Cash inflows		2096120
Less: Present value of Outflows
Initial investment of cost of Robot	1600000
Add: Installation and Software cost	450000
Present value of outflows			2,050,000
Net present value				46,120

Requirement3:

To determine

The net present value of project with changes to actual figures of labour hours saved and installation cost actually incurred.

Answer to Problem 30P

Solution: The Net present value of Project after making revision as per actual figures of labour hours saved and actual installation cost incurred is $(148,520)

Explanation of Solution

The statement showing revised net present value of the project is as under:

Computation of Net present value of project of Purchase of Robots
Net Annual savings:
Savings in Annual carrying cost of Inventory	210000
Savings in Labour cost (22500 DLH @16)	360000
Total savings			570000
Less: Annual Increase in Power cost	30000
Net Annual savings				540000
Annuity Present value factor (i=20%, n=5)		2.991
Present value of Annual savings in cost		1615140
Add: Present value of Release of Inventory		333200
($ 400,000* Present value of 1st year i.e. 0.833)
Add: Present value of Salvage value of investment		28140
($ 70,000 * Present value factor for 5th year i.e. 0.402)
Total Present value of Cash inflows		1976480
Less: Present value of Outflows
Initial investment of cost of Robot	1600000
Add: Installation and Software cost	525000
Present value of outflows			2,125,000
Net present value				-148,520

Requirement4:

To determine

The additional benefits to be derived from undertaken of the project and Amount of benefit which must accrue each year.

Answer to Problem 30P

Solution: The Additional benefit which must accrue on undertaking the projects is savings in further carrying cost of inventory which had happen and will be released at the end of year. This cost will go on increasing with the increase in production level. Also, with the increase in production, there will be lot more savings in labour hours, resulted in savings in labor cost further.

The Additional Annual benefit which must accrue to the project each year must be $ 49656 to make project yield 20%.

Explanation of Solution

The Annual additional benefit which must accrue to the company shall be $ 49,656 per annum and has been computed as follows:

Computation of Annual additional benefits to accrue in project
Net present value				-148520
Therefore, Present value of annual benefits must be	148520
		in 5 years of life
Divide: Annuity present factor (i=20%, n=5 years)	2.991
Equivalent Annual benefits which accrue each year	49656

Conclusion

To conclude, it must be said that alternative which is having lower net present worth in terms of cost and higher net present worth in terms of inflows, shall be accepted among the alternatives.